Tax, development and international relations

Some fascinating snippets from the IMF’s new paper on fiscal transparency

Today in my inbox is an blog post in which “Two Richards Talk Fiscal Transparency” – the Richards concerned being one current (Richard Allen) and one former (Richard Hughes) head of division in the IMF’s Fiscal Affairs Department.I’ve pulled out two interesting things from the blog post and associated paper [pdf]: the statistics showing how governments weren’t truly aware of their underlying fiscal positions before the crisis, and some of the IMF’s new proposals for its Code of Good Practices on Fiscal Transparency. NGOs take note: there’s going to be a consultation on the latter.

Fiscal transparency and debt shocks

The primary motivation behind the blog post and paper seems to be the ways in which governments’ accounts don’t always provide enough information with which to assess potential risks to the public finances, which were highlighted by the financial crisis and the resulting debt shocks. These shocks were generated by three things: 1) unexpected external shocks, in particular the fall in economic output that reduced government income and increased costs such as social security, 2) unanticipated policy measures in response to the recession, and 3) “incomplete information about the government’s underlying fiscal position.” The latter is elaborated by Richard Hughes:

There’s a section in the paper which reviews the experience of the ten countries that saw the biggest unexpected increases in government debt between 2007 and 2010. All of those countries were advanced countries. Obviously, the financial and economic crisis itself played a big role in this, but when you break it all down, about a quarter of that debt shock was due to failures in retrospective fiscal reporting; or gaps in what the governments should have known about the present state of their finances, rather than any uncertainty about what might happen in future.

A table in the paper shows that this “one quarter” statistic is not across-the-board, but the result of well-known and disproportionately large errors in Greece, Portugal and Iceland. But it’s also quite large for the US (one quarter of the higher than expected debt, attributed in part to Fannie Mae and Freddie Mac) and even Germany (one sixth).

Some development implications of proposed revisions to the IMF fiscal transparency code

On to a few highlights from the proposed ‘new standard for fiscal reporting’. I’m going to cherry-pick a couple of points that I imagine NGOs might make in the consultation – the full list is on page 28 of the IMF paper [pdf]:

There’s a new recommendation to analyze the distributional impact of government policies on households. This has been an NGO demand for some time, but the IMF recommendation is only halfway to meeting it, because an analysis that stops at the household level is unlikely to capture the differential impact of policies on men and women.

The proposals for the new code also state that countries should separately identify the impact of new policy measures, noting OECD research showing that most countries don’t “systematically distinguish the fiscal impact of current and new policies” or “prepare disaggregated multi-year budget estimates”. That means that at present, the information available to legislators and the public doesn’t allow them to work out the impact of particular policy proposals (such as their distributional impact).

Outside of the specific recommendations, the IMF paper also includes an interesting discussion on civil society engagement in fiscal policymaking. Astonishingly, according to an International Budget Partnership paper cited by the IMF, “in more than one-third of countries, all budgetary discussions between the legislative and the executive are conducted behind closed doors.”

Noting that “[c]itizens, civic groups, and markets also have a vital part to play in holding governments to account for the use of their money and in pressing for transparency improvements,” the paper suggests that governments should produce citizens’ guides to their budgets, and hold public hearings on budgetary matters.

The existing code and manual are worth a read, and NGOs will find much to agree with, not least the sections on disclosing tax expenditures and natural resource contracts.